Notes From Underground: This Market Is a Tribute to Rudyard Kipling’s “IF”

“If you can keep your head when all about you
    Are losing theirs and blaming it on you”
The opening stanza of Kipling’s poem about British stoutness is not to say others are blaming but rather an admonition from Notes From Underground about keeping your wits about you and trying to make quality decisions in trying times. In a financial world that is steeped in excess leverage, nanoseconds and algorithmic trading programs ,being a fundamental/technical trader seeking relative value becomes a daunting task. I am not one who favors catching “falling pianos” and have been more content to let trades come to make rather than force the action. As the markets unwind leveraged trades that causes massive selling across all asset classes.
If Turkey is troubled, Syria in flames, China slowing and Brazil troubled, then it is time to disgorge an entire portfolio. Chairman Bernanke, devoid of political analysis in his super computer modeler, makes the bastion of safety and comfort, the U.S. Treasury market, a volatile and turbulent asset class, all because the FED determines that no time like the present to “taper” the QE program. All in all, a toxic potient. IF in this mess we can find some values, WE WILL TRULY KEEPING OUR HEADS.
***One place I find interesting is an old theme of NFU, the Mexican peso. Yes, I am aware that the MP is a very crowded investment and is the mainstay of many investor’s emerging market portfolios. The Mexican peso has declined 18% off its highs made in early May, a precipitous drop indeed. In the same relative period the S&P is down 6 percent. If you think the Mexican story is a U.S. story then the Mexican peso would have to be heavily oversold relative to its value anchor. I believe that the Mexican investment story is far bigger than just the U.S. The current government of President Nieto plans on bringing forth legislation to allow foreign investment into PEMEX for the first time since 1938.
The nationally owned Pemex is in dire need of capital so as to have the investment to search for new oil fields as its current workhorse, CANTARELL, is in decline. Again, 40 percent of the Mexican budget revenue is from Pemex earnings so the need for foreign capital is real. In addition, the Mexican story is not one of 1994, when Mexico was subjected to the “Tequila Crisis,” a weakening currency with a huge amount of debt denominated in an appreciating U.S.DOLLAR. A recent Bloomberg article pointed out that at this juncture Mexico is in a much better position then 1994.
Earlier this year, “Mexico’s government took advantage of lower borrowing … to lock in yields on benchmark bonds as low as 4.48% as it boosted the average local currency debt maturities to a duration of eight and a quarter years, about fourteen times longer than 1994 ….”
In a hat tip to KJM, he noted in a conversation that the PESO/YUAN chart looked very interesting. The YUAN is making all-time HIGHS versus the PESO at a time when the PERMABULLS on U.S. equities are making the case about a re-industrialization boom driving the U.S. market higher. A stronger U.S. feeds into a revitalized Mexico, especially as the Mexican currency in a low inflation global environment makes the Mexican labor market an attractive alternative to China. As Keynes famously said, “Markets can remain irrational much longer then you can remain solvent.” Keynes’s fellow Brit may have retorted, “Yes J.M., IF you can keep your head.” As always, I caution to do your technical analysis to find risk parameters that suit your profile. Preservation of capital is always an important feature of NOTES.
***A quick hitter: ECB President Draghi was on the stump today as he delivered a speech in Berlin and noted that OMT is now even more important “to buy bonds issued by indebted countries’… as we see potential changes in the monetary policy stance, with assorted uncertainty, in other jurisdictions of the global economy.'” As usual, he “stressed that troubled countries could not get help from the bond purchase without committing to reforms.” (AP, David McHugh and Geir Moulson). It seems that President Draghi needs to continue to placate the Germans by insisting there can be no QE without severe conditionalities.
Mr. Draghi, austerity for the sake of financial assistance cannot do the trick without the recipient also depreciating its currency. Otherwise the measures will be half-hearted. The ECB has to be fearful of Dallas Fed President Richard Fisher’s “HERD OF FERAL HOGS” for they will certainly root out the major weaknesses facing the ECB and entire European financial system. Mario Draghi, you have kept your head, but the market will test you to see:
 “If you can make one heap of all your winnings
       and risk it on one turn of pitch-and-toss”
President Draghi, the world may well demand action on OMT  the forces are building.

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8 Responses to “Notes From Underground: This Market Is a Tribute to Rudyard Kipling’s “IF””

  1. Nate Says:


    Would you be willing to share your thoughts on the gold and silver hit over the last few months? Something doesn’t seem right. Why now? Why when things seem at their least certain in the market place? Everything seems so right to own the metals, yet they get pummeled day after day. Conspiracy theorists say someone wants to shake the metal loose from the weak hands. I just say, something is not right.

    I am not a trader, I like to hold the stuff.



  2. yra harris Says:

    Nate—The safe haven status of Gold and its rightful place as a recognized gloabl currency placed fold at the top of the investment class for the 10 of the last 12 years.But as I have written and discussed for the last eight months,as traders and investors became more comfortable with equities and other investement gold has moved down the ladder .The GOLD /CURRENCY charts signaled problems with gold when the gold/euro and gold/swiss charts broke down even in the face of Draghi’s OMT.It seems that the first weight upon gold was that draghi was able to stabilize the Euro even though the ECB didn’t spend a dime and in fact,some of the previous liquidity add[LTRO[ was being paid down.Most recently the GOLD/YEN cross gave way as the cost of gold in YEN broke below the levels that existed prior to the beginning of the BOJ’s attempt to weaken the YEN,back in late October .Now as interest rates have moved higher and some U.S. debt actually has a REAL POSITIVE YIELD more long term holders of gold have begun to liquidate.Is this the end of the long term view for gold?Maybe,but I believe that the nexy leg for the gold will be found in the throws of a european crisis—this crisis will precipitate a rush back to gold for unlike the previous Japanese and others efforts–there has already been a massive unwinding of positions.I have previously blogged that the $1048 level–key because that is where the IMF and INDIA gold deal took place.I haven’t yet looked at the GOLD in terms of YUAN,but that may provide the most important look of all.

  3. Alex F Says:

    I think of gold as more of an inflation hedge than a safe haven and inflation in the US is very low right now. At the end of May, core PCE hit its lowest level EVER.

    People are starting to realize that QE does not necessarily lead to inflation and are unwinding metal positions they put on when that was the market’s belief.

  4. yra harris Says:

    Alex –for the last five years I have been in disagrrement with you.The GOLD reacted to the deflation threat because it knew that Bernanke was a 1937 er and would do all possible to insure against a deflationary spiral—I do not believe that it went up becuase of inflation—and if deflation is a threat the long end of the yield curve must be the best buy in the world and has real value—I have written that gold would struggle as the return to equity markets have taken up the cudgel of safe haven and a dividend return

  5. Alex Says:

    Never forget that Gold is one of the few financial assets that can be bought in 5 seconds that has NO counter-party risk. I admit that Gold right now looks dreadfull but if/when traders and investors get worried about counter-party risk on their assets, watch Gold go. We’re not there now of course.

    It’s also a great hedge against political stability. If you have confidence in your politicians thenGold is a short. If you’re worried about their performance long term then you’d be mad not to own some, even if it goes lower.

    If/when the boys really go for Gold then it will be too late to buy, unless you like to buy after the price has already moved $100+.

    Whatever the case, Gold is going to be interesting from now on, for both the holder and the casual observer.

    PS. As for the inflation hedge. No real inflation from 2000-2010 yet it was one of the best performing assets….

  6. yra harris Says:

    Alex—just for the record—political instability does little for gold –and if you had bought on every outbreak of war you would be broke—The greatest impact on gold is negative real yields and the perceived threat to fiat currencies—which we both know exists in spades but the world is actually growing complacent.I think it will be europe which ignites the next significant rally in gold—when Draghi is finally forced by insolvent banks to open up the monetary spigots/and or as J.S. has written –european depositors finally begin to brush off the complacency and realize that they are the sucker at the poker table

  7. mcb Says:

    I noticed that the beginning of the gold drop coincided with Germany announcing its intentions to repatriate her gold, among other reasons.

  8. Chicken Says:

    $1221 became the geometric target once $1266 was breached. I place a high degree of confidence with Yra’s thesis, although mine is stupid simple in comparison and arrives at similar conclusion up until this point.

    Perhaps I’m just not convinced Europe will prove to become a terminal basket case, although my respect for Germany places me squarely on the fence.

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